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Better ways to tax: Australia in the spotlight

Author: ICAEW Insights

Published: 27 Nov 2020

The word 'Australia' on a green background

The pandemic has presented governments with the opportunity to reform their tax systems with incentives and infrastructure in place to encourage investment. But will they? We take a look at what is expected from Australia. Words by Christian Doherty.

So far the Australian economy has weathered the COVID-19 storm relatively well, with a contraction in GDP of around 5%. However, there are signs that unemployment in particular is set to increase.

“You have to remember we’ve had 25 years of uninterrupted economic growth in Australia,” says Robert Breunig, Director at the Tax and Transfer Policy Institute, part of the Australian National University in Canberra. “So we’re not used to this – my students have never been through two consecutive quarters of negative GDP growth.

“The 25 years of prosperity has allowed the tax system to get very leaky and it hasn’t really bothered us. But now it’s going to be a problem.”

And when it comes to tax and COVID-19, Breunig identifies two main themes. “The first is that the rescue measures cost a lot and we’ll be paying for them through the tax system, so is the system up to the job of raising more revenue? And second, is it set up to deliver economic growth?”

Australia’s main tax weapons have been twofold. Australian companies are now able to temporarily immediately expense 100% of the cost of depreciable plant and equipment. However most of that investment is simply brought forward rather than new spending. Simultaneously, some companies are now allowed to carry back their current year losses to offset profits in prior years. This offset may result in those companies obtaining a tax refund for tax paid in that prior year.

The need for long-term structural reforms is getting more urgent. “Economic theory suggests you should have low tax rates that are broadly applied, with progressivity built in,” Breunig explains. Australia, however, tends to do the opposite: high taxes, levied on a narrow base of both corporates and individuals.

“On the corporate side it results in an effective tax rate of around 17% (not the 30% as advertised), with high rates applying to mining companies and banks whose super profits are effectively taxed. So while that’s quite efficient, it locks us into that model.”

Indeed, there is mounting evidence that Australia’s tax regime stifles other types of businesses, with a growing number of start-ups taking advantage of offshore structures.

But solutions aren’t simple. A lower corporate rate, for instance, could result in a lot of money leaving the country via dividends to overseas investors in banks and mines.

Breunig believes one practical reform could be to more effectively tax the miners and banks, while developing a parallel system for others. “You could bring in a mineral tax or bank tax and lower the broader rate; or you could move to a different kind of tax system with an allowance for corporate equity which would see ordinary firms only paying corporate tax on excess profits.”

Susan Franks, Senior Tax Advocate at Chartered Accountants Australia and New Zealand says: “As Australia is freeing up internal travel restrictions and relaxing some social distancing requirements, the government is looking to stimulate both business investment and consumer demand to generate jobs.

“The tax system has been used to assist in this process by bringing forward proposed personal tax rate reductions for low and middle income earners, introducing a limited period 100% expensing of depreciable plant and equipment for entities with less than a $5bn turnover, and a temporary loss carry-back provision for companies.”

Franks adds, “COVID-19 has resulted in massive deficits for both Federal and State governments in Australia. As the economy recovers it is expected that there will be a change of focus towards the sustainability of the tax system and in particular intergenerational equity. But that discussion seems too far off in the future as the world is still dealing with various waves of COVID-19.”